Markets for Ecosystem Services – New Challenges and Opportunities for Business and the Environment

A Perspective

Businessand

Ecosystems

01-20_ARP.indd 1 27.09.2007 16:11:50

This briefing paper outlines the potential for mobilizing business and markets to conserve nature. It argues that market mechanisms can be a powerful complement to existing strategies for conserving ecosystems, if used in the right way.1

The paper is intended for both the business and

conservation communities, in an effort to establish a

shared vision of market-based approaches to nature

conservation. It builds on current scientifi c research

underlining the economic value of ecosystems, as well

as recent inter-governmental decisions to enlist the

private sector in conservation efforts.2

The Millennium Ecosystem Assessment (MA) assessed

the global status and trends of 24 critical ecosystem

services, including “provisioning” services, such

as the supply of freshwater, biomass fuel, food

and fi bers, as well as “cultural”, “regulating” and

“supporting” services that underpin human well-

being.3 The MA concludes that some two-thirds of

the world’s ecosystem services are degraded or being

used unsustainably, while also noting that demand

for ecosystem services is rising, fuelled by population

growth and economic development.

The natural wealth of biological diversity (“biodiversity”)

includes the myriad species, complex ecosystems and

constantly evolving genetic structure of living resources.

Conserving biodiversity is central to sustaining

ecosystems and the services they provide (Figure 1).

A growing body of research documents how

biodiversity increases productivity in different sectors,

enhances people’s enjoyment of nature, reduces

ecological and associated health risks, and improves

resilience in the face of shocks.4 At a fundamental

level, all economies and businesses depend directly or

indirectly on the conservation of biodiversity and the

sustainable supply of ecosystem services.

Introduction

Contents

Ecosystem services are everywhere 2

Why make markets for ecosystem services? 3

How to develop markets for ecosystem services 4

• Direct payments: Creating incentives for

resource managers to supply ecosystem services 5

• Tradable permits: Using the market to

manage environmental liabilities 6

• Certifi cation: Helping consumers and

investors make informed choices 8

• Limits on markets for ecosystem services 11

Towards markets for ecosystem services 12

Getting started 13

01-20_ARP.indd 2 26.09.2007 15:17:34

1

Biodiversity loss and ecosystem degradation thus have

profound effects on people all over the world. The

decline in provisioning services such as freshwater and

fi ber directly affects the livelihoods of communities

that rely on natural resources for subsistence and cash

income, while the loss of or changes in the quality or

timing of regulating services, such as natural fl ood

defenses and pest control, can leave millions of people

at increased risk of disaster.

Ecosystem degradation affects businesses that rely on

natural resources for raw materials, waste assimilation

or indirect support for production processes. Loss

of ecosystem services can also undermine a healthy

workforce. Consumers ultimately shoulder the burden

in the form of higher costs of goods and services,

higher insurance premiums, or higher taxes to cope

with natural disasters.

“The degradation of ecosystems and the services they provide … destroys business value and limits future growth opportunities.”

World Business Council for Sustainable Development, 2005

Figure 1: The diversity of life (biodiversity) underpins the supply of all ecosystem services

Genetic Diversity Species Diversity Ecosystem Diversity

Conserving ecosystems and sustaining the services

they provide is a pre-requisite for prosperity.

Environmentalists have long argued this. Business,

governments and society at large are catching up. All

stakeholders have a role in efforts to sustain ecosystem

services. The conservation community has knowledge

of ecosystems and methods of effective management.

Business can bring capital, research and technology,

sophisticated production and distribution capacities.

Government can defi ne standards and develop

enabling policies. The general public needs to support

the process as a whole.

01-20_ARP.indd Sec1:1 26.09.2007 15:17:35

Ecosystem services underpin markets everywhere; this simple fact is the foundation of many new eco-enterprises. Markets for biodiversity or for ecosystem services may sound unusual, but in fact they are already a reality.

Nature-based tourism is perhaps the best-known

example of how private enterprise depends directly

on the health of surrounding ecosystems. The owners

and managers of eco-tourism ventures need little

persuasion to invest in the conservation and sustainable

management of natural resources that form the basis

of their business. Even nature-based tourism captures

only part of the total demand for conservation; surveys

indicate that people are willing to pay for wildlife in

foreign countries they have no intention of visiting.5

The drivers of business investment in ecosystems

include: legal requirements and tax incentives; rising

expectations from investors, customers, shareholders,

local communities and/or NGOs; securing long-term

license to operate; and helping to shape and prepare

for future environmental regulations.

The NamibRand Nature Reserve 6 in Namibia

is in many ways a model ecotourism venture. The

reserve was set up to provide critical habitat for

populations of Oryx antelopes and mountain Zebras.

It covers 175,000 hectares and is owned by an

association of nine landowners and investors.

This association has granted fi ve exclusive

concessions to tourist operators. They organize

tourist visits and in return pay 10-15% of their gross

income to the owners of the reserve. The tourism

operators are bound by a strict code of practice.

Although the landowners initially subsidized the

reserve, today it is self-fi nancing.

The creation of this private reserve has resulted

in the preservation of a unique desert ecosystem,

the restocking of the area with Cheetah, and the

removal of 1,500 km of commercial farm fences

to allow free migration of Oryx. The outstanding

reputation of the reserve and its economic

success have attracted some of the country’s most

experienced game rangers.

A major factor in the emergence of eco-enterprises

and markets for ecosystem services is the growing

environmental concern among more affl uent consumers

who increasingly insist on products and services that

are demonstrably sustainable. Demand for organic food

and certifi ed sustainably harvested timber, for example,

has been growing at double-digit rates in recent

years7 and is often outpacing growth in conventional,

uncertifi ed products in the same sectors. While even

eco-products and services can cause environmental

damage, their growing market share demonstrates that

the need to balance consumption and conservation is

on the minds of consumers everywhere.

More and more businesses realize that good profi ts

can be earned from sound ecosystem management. A

fi rst step for many leading companies is to distinguish

themselves from competitors and curry favor with

consumers by supporting environmental causes. This

includes reporting business impacts on ecosystems or

contributions to conservation activities, or subscribing

to voluntary schemes that certify business compliance

with certain performance standards.

Such initiatives are just a start. Experience around the

world suggests that maintaining, restoring or enhancing

ecosystem services is a growing business opportunity.8

New business models are being developed to deliver

environmental benefi ts, including many intangible but

valuable ecosystem services, such as water fi ltration,

erosion control and coastal protection that can no

longer be taken for granted. Far-sighted business

leaders see opportunities in ecosystem markets and

are investing in them. Ultimately, however, only those

companies that demonstrate signifi cant improvement

in ecosystem outcomes, supported by independent

verifi cation, deserve the title of eco-enterprise.

2

Ecosystemservices are everywhere

01-20_ARP.indd Sec1:2 26.09.2007 15:17:38

3

The market is a powerful institution and the basis of much of the dramatic improvement in human well-being that has occurred in recent generations. However, market-based economic growth has passed many people by. At the same time, it remains a major driver of ecosystem degradation, as natural resources are consumed and waste is generated.

Seen in this light, several reasons to mobilize markets

to conserve biodiversity and provide ecosystem

services can be identifi ed: fi rst, to capitalize on the

strengths of business and the sheer power of markets;

second, to address existing weaknesses in markets that

have resulted in widespread degradation and loss of

ecosystem services; and third, in some cases, to help

improve livelihood opportunities in impoverished rural

landscapes. Making the best of these opportunities

requires a dramatic change in the way we think about

business and the environment.

Many companies spend a great deal on reducing

environmental damage, both in response to legal

requirements and on a voluntary basis. However, so

long as environmentally harmful activities are less

costly or more profi table than friendly ones, people

and companies will be tempted to take advantage

of this fact or make only token contributions to

environmental protection, while continuing to devote

most of their effort to “business-as-usual”. Some

companies believe they can wait until more stringent

regulations come into force without suffering a loss

of business value. However, the pace of change in

consumer expectations and market preference makes

this an increasingly unsafe assumption.

Governments and many NGOs also expend

considerable effort on monitoring and responding

to the environmental impacts of business. This is an

essential and unavoidable role but one that can be

made much easier if incentives for good environmental

performance are aligned with the business bottom line.

Taxes, charity and regulation all have their place in

the conservation tool kit. At the same time, there is

growing interest in complementary, market-based

approaches that make sustainability profi table in its

own right. Evidence from around the world suggests

that market-based instruments can achieve some

environmental objectives at lower economic cost than

conventional approaches, such as uniform pollution

standards or technology mandates.9 Other advantages

of market-based approaches include greater fl exibility

and innovation, more sensitivity to consumer

preferences, better access to investment capital, and

reduced enforcement costs due to alignment between

private and public interests.

Market-based approaches to ecosystem management

are not just of interest to businesses and environmen-

talists. Such approaches can also contribute to other

goals, notably the reduction of poverty and inequality

in developing countries.10 The logic is simple: increasing

numbers of ecosystem service users live in urban areas.

They need water, energy, food and fi ber, recreation and

other goods and services from nature. Meanwhile, the

supply of ecosystem services generally comes from rural

areas. On average, and especially in the developing world,

urban residents are better off than rural communities.

The development of markets for ecosystem services can

therefore help to address the economic disparity between

urban and rural populations. Similarly, at an international

level, ecosystem markets can increase the value added

of exports from developing countries to developed

economies and thus boost transfers from richer to poorer.

Special efforts may be required, however, to ensure that

ecosystem markets do not adversely affect the poor

by reducing rural employment or restricting access to

essential natural resources. Furthermore, to the extent

that the poor are users of ecosystem services, they may

be adversely affected by reforms that increase the cost

of such services or of the products derived from them.

Perhaps the greatest challenge to enlisting markets in

ecosystem conservation is the conviction that certain

ecosystem services are or should remain freely available

to all, provided by government, and beyond the reach

of market forces. If scarce resources are not managed

by the market, of course, then other solutions must

be found or the resources in question are liable to

disappear. Both business and environmentalists have

a responsibility to help fi nd effective and socially

acceptable solutions for managing ecosystems in the

face of increasing demands.

Why make markets for ecosystem

services?

01-20_ARP.indd Sec1:3 26.09.2007 15:17:40

4

Growing awareness of the limitations ofconventional approaches to ecosystemmanagement has led to a search for newways to align private and public interests.This can be seen as part of wider efforts toenlist the private sector in the provisionof a range of public goods (e.g., health,education, infrastructure, etc.) throughpublic-private partnerships and the use ofeconomic incentives.

The challenge for business, governments, NGOs

and consumers is to accelerate the transition from

ecosystem management as purely a business cost (i.e.,

mitigation of risks and adverse impacts), or as a non-

profi t charitable activity, to developing the supply of

ecosystem services as profi table business opportunities.

Three main approaches are available:

Direct payments: Creating incentives for resource managers to supply ecosystem services;

Tradable permits: Using the market to manage environmental liabilities;

Certifi cation: Helping consumers and investors make informed choices.

Within each of these three approaches one can further

distinguish between initiatives that focus on promoting

eco-friendly production systems for existing goods

and services (e.g., ecotourism); encouraging the

private sector to conserve particular habitats, species

or genotypes associated with a range of ecosystem

services (e.g., wetland mitigation), and mechanisms

that treat specifi c ecosystem services as a commodity

(e.g., carbon sequestration). More examples are

provided in the following diagram.

Figure 2: Alternative market mechanisms for ecosystem services

Direct fi nancial, e.g.,

private payment for

watershed protection

Voluntary, e.g.,

biodiversity offsets

not required by law or

voluntary carbon offsets

Tradable permits

Using the market to manage environmental

liabilities

Voluntary eco-labeling,

e.g., FSC, PEFC or

fi rm-level policies, e.g.,

Equator Principles

Certification

Helping consumers and investors make informed choices

Direct payments

Creating incentives for resource managers to supply ecosystem

services

Pu

blic

Man

dato

ryP

rivate

Vo

lun

tary

Subsidies and tax

incentives, e.g., US

tax relief on charitable

contributions leading to

donation of land

Regulated

(or “compliance”)

markets, e.g., carbon

trading under the

European Emissions

Trading Scheme

Public schemes

e.g., European Union

eco-labeling

How to develop markets for ecosystem

services

01-20_ARP.indd Sec1:4 26.09.2007 15:17:41

5

Direct Payments

Creating incentives for resource managers to

supply ecosystem services

Business and governments

are increasingly aware

of the importance of

ecosystem services

provided by private land

users to secure production

systems, amenity values

and, in some cases, entire

economies. This has led

to various initiatives to encourage private land users to

maintain or enhance the ecosystem services they supply.

Governments in several countries have developed

subsidies and tax incentives to encourage resource

conservation. In the United States, for example, income

tax relief on charitable contributions has motivated

donations of land or “development rights” (also

known as “easements”) to private environmental trusts

around the country, thereby protecting over 810,000

hectares.11 Similar tax incentives are currently used in

Europe and some developing countries.

A more direct approach that has been successfully

implemented in several countries involves payments

for the delivery of specifi c ecosystem services or, more

commonly, payments for maintaining or adopting

land uses that are thought to provide such ecosystem

services. One of the most widespread examples of

this approach is payment for watershed protection.

This is based on the growing awareness among water

users that conserving natural forests in watersheds

and reducing pollutant loads in run-off from upland

areas can be a cost-effective means of providing

reliable supplies of clean water for hydroelectric power

generation, irrigation, industrial, domestic

and recreational uses.

Under such schemes, central governments or private

water users make payments for watershed protection

to landowners, environmental agencies and/or

conservation NGOs. Industry has played a leading role

in several cases, both as a benefi ciary and a buyer of

watershed protection services.

In northeastern France, Nestlé Waters concluded

a private agreement with local farmers to protect

the mineral water source from nutrient run-off and

pesticide residues generated by intensive farming

activities. The company purchased some agricultural

land and reforested it. The company also signed

long-term contracts with the local farmers to adopt

farming practices that reduce nitrate pollution. Nestlé

fi nanced the conversion costs and paid US$ 230 per

hectare per year to compensate farmers for reduced

profi tability. In return, Nestlé secured a supply of

high-quality mineral drinking water for its operations.

Experience suggests that payments for watershed

protection are most appropriate when buying the

resource outright is too expensive (and unnecessary);

mitigation is less expensive than alternative technical fi xes

(e.g., water fi ltration); provision of the desired service

is verifi able and enforceable; transaction costs are not

prohibitive; and someone is willing to pay the price.12

01-20_ARP.indd Sec1:5 26.09.2007 15:17:50

6

Tradable permitsUsing the market

to manage environmental

liabilities

A very powerful, market-

based approach to

ecosystem management

involves creating new

rights or liabilities for the

use of natural resources,

and then allowing business

to trade them. Such an

approach can signifi cantly

reduce the public cost of protecting the environment

and/or maximize the value of resource use.

Perhaps the best-known example of tradable

environmental rights is that of carbon credits based

on government-allocated emission allowances and/

or the purchase of voluntary carbon offsets by both

organizations and individuals. The global carbon trade

was worth over US$ 30 billion in 2006 and is expected

to grow substantially in the future.13

Similar approaches have been developed for the

conservation of natural habitats (see “Biodiversity

offsets” box) and for some ecosystem services.

Examples include the emergence of wetland banking

in the US,14 trade in forest conservation obligations in

Brazil,15 and markets for ground-water salinity credits

in Australia.16 What all of these initiatives have in

common is the possibility of trade, i.e., buying and

selling environmental obligations to meet government

mandates or voluntary aspirations.

“Bringing conservation groups and business together to deliver concrete biodiversity outcomes through the market is both an opportunity and a challenge.”

Building Biodiversity Business, 2007

Biodiversity offsets are conservation

activities intended to compensate for the residual,

unavoidable harm to biodiversity caused by many

development projects.17 One of the most well-

established systems of biodiversity offsets is wetland

mitigation and conservation banking18 in the United

States. Here, federal and state laws require “no net

loss” of wetlands and the conservation of habitat

for endangered species. Regulations require both

public and private developers to compensate for or

“mitigate” the loss of natural habitat, when adverse

impacts are considered unavoidable, by fi nancing

the creation, restoration and/or protection of

comparable habitat. The logic of biodiversity offsets

is that similar or, in some cases, superior ecosystem

function (i.e., services) can be provided off-site.

01-20_ARP.indd Sec1:6 26.09.2007 15:17:51

7

PI PI PI

Av

MM

Rs

ACA

BiodiversityValue

OfsOfsNet Positive Impact

Av Av Av

Residual Impact

Elements of NPI

Positive

Negative

Rio Tinto’s biodiversity strategy sets out the long-term goal

of Net Positive Impact on biodiversity. This means ensuring,

where possible, that Rio Tinto’s actions have positive effects

on biodiversity features and their values that not only balance

but are broadly accepted to outweigh the inevitable negative

effects of the physical disturbances and impacts associated

with mining and mineral processing. They aim to achieve this

by reducing impacts and implementing positive conservation

measures in the form of biodiversity offsets and other

conservation measures.

The fi gure above illustrates how a company can reduce

negative biodiversity impacts through the mitigation

hierarchy (avoidance, mitigation and restoration) and have

a positive impact on biodiversity through the use of offsets

and additional conservation actions, with the overall aim of

achieving NPI as indicated by the positive value on the graph.

Figure 3: Biodiversity offsets and impact mitigation – Defi ning Net Positive Impact (NPI) in Rio Tinto

Long-term prospects for tradable ecosystem services

may eventually include international trade in

conservation credits, similar to the market for carbon

credits.19 Unlike CO2, however, many ecosystem

services are not homogeneous or global in scope.

While international trade in ecosystem credits may

be a distant prospect, there are many opportunities

to support the development of tradable rights as a Source: A

nstee et al, in Preparation.

new business sector at local, national and corporate

levels. Even where government does not require

compensation for the loss of ecosystem services, some

companies and agencies are cooperating to establish

offsets on a voluntary basis.20 Such initiatives could be

encouraged more widely, with a focus on companies in

land-using sectors, e.g., agriculture and forestry, oil and

gas, road construction, utilities, mining, etc.

Predicted Impact

Unmitigated impacts of an operation with no environmental management

Avoidance Planning or design change that avoids future negative impact e.g., relocating infrastructure

Mitigation Action that reduces the severity of the impact e.g., buffer zones

Restoration Action that restores biodiversity value on a previously disturbed site e.g., rehabilitation of native vegetation

Offsets Quantifi able conservation actions taken to compensate for residual, unavoidable harm to biodiversity

Additional ConservationActions

Actions taken by Rio Tinto at project, business and corporate levels that have led, or are predicted to lead to, positive conservation outcomes. The impacts are positive but diffi cult to quantify e.g., environmental education, capacity building

Key:

01-20_ARP.indd Sec1:7 26.09.2007 15:17:54

8

One of the best-

established market-

based mechanisms for

ecosystem management

is the use of eco-labeling

and certifi cation schemes

to distinguish products

and services by their

social and environmental

performance. The premise of such schemes is that

consumers will prefer to buy or even pay more for

certifi ed goods and services. While this is not always the

case, a number of certifi cation schemes have gained

wide consumer recognition and a growing share of

sales in some markets. Independent certifi cation of

environmental and social performance has proved to be

a highly adaptable and powerful tool for encouraging

more sustainable operations in a range of business

sectors, including agriculture, forestry, fi sheries, tourism

and fi nancial services. Initiatives are currently underway

to extend the same principle to the carbon market,

through the certifi cation of voluntary carbon offsets.

One leading agricultural standard is GLOBALGAP

(formerly known as EUREPGAP), developed by a

not-for-profi t partnership of retail and food service

companies and their suppliers. GLOBALGAP started

in 1997 as an initiative of retailers belonging to the

Euro-Retailer Produce Working Group (EUREP). It

subsequently evolved into a partnership of agricultural

producers and their retail customers. GLOBALGAP

develops standards and procedures for the certifi cation

of good agricultural practices (GAP), in order to ensure

that agriculture is undertaken in a way that respects

food safety, the environment, workers’ rights and the

welfare of animals.

Agricultural certifi cation is well established in Europe

and growing rapidly in the rest of the world, both in

terms of sales volume and market share. For example,

GLOBALGAP participation has grown from about

4,000 certifi ed growers in 20 countries in 2002 to over

80,000 certifi ed growers in over 80 countries in 2007,

representing all major food retail companies in Europe.

Another well-established form of certifi ed agriculture,

especially in developed countries, is organic agriculture.

A recent survey by the International Federation of

Organic Agricultural Movements (IFOAM)21 found

more than 31 million hectares of farmland under

organic management worldwide (or equivalent to 2.1%

of total arable land, based on Food and Agriculture

Organization data). The global market for organic

products reached a value of US$ 33.8 (25.5 billion

Euros) in 2005, with the vast majority of products

consumed in North America and Europe.

240

49

117

307

1004

747

119226

191250

16

2

15 85

144814

420

386

1161

33130

207 7

671

1

20

74565

90 16

2

4

1

256

517

Figure 4: Global distribution of GLOBALGAP certifi ed growers in 2006

Certification Helping consumers and investors make

informed choices

Source: GLO

BALG

AP, 2007.

AgricultureMajor food and agriculture companies are becoming

increasingly interested in promoting more sustainable

agricultural practices, partly in response to pressure

groups but more fundamentally in order to protect

their supply chains and consumer markets. Various

labels and certifi cation standards are used to

distinguish farms that adopt food safety, environmental

issues, social standards, and animal welfare, such

as “bird friendly”, “shade-grown”, “conservation”,

“sustainable” and “organic”.

01-20_ARP.indd Sec1:8 26.09.2007 15:17:56

9

ForestryIn the forest sector, claims about the sustainability

of resource management are increasingly tested

and validated through certifi cation by independent

organizations. Examples include regional and national

standards developed by the Forest Stewardship

Council (FSC), as well as various national standards

recognized by the Programme for the Endorsement

of Forest Certifi cation Schemes (PEFC) in Europe, the

US, Canada, Australia, Brazil and Chile. According

to UNECE/FAO’s Forest Products Annual Market

2005–2006 Review, about 7% (approx. 270 million

hectares) of the world’s forests are independently

certifi ed for sustainability.

Forest certifi cation is widespread in temperate and

boreal forests in North America and in Western Europe

but has been slower to take off in the tropics. Most

certifi ed forests in developing countries are found in

plantations in Central and South America, with barely

any certifi ed forests in Africa. The major markets

for certifi ed timber are the UK, Germany and the

Netherlands, followed by the US, Japan and France.23

The challenge for small-scale and developing country

producers wishing to gain access to high-value markets

for certifi ed forest products lies in the signifi cant costs

of achieving higher environmental standards, as well

as the costs of the certifi cation process itself, in a

market driven by increasing competition from low-cost,

plantation-grown timber.

0

50

100

200

300

150

250

1998

1999

2000

2001

2002

2003

2004

2005

2006

Figure 5: Certifi ed forestry area worldwide, 1998-200622

(mill

ion

hect

ares

)

01-20_ARP.indd Sec1:9 26.09.2007 15:17:59

10

FisheriesMany policy and management interventions have

been proposed to improve the sustainability of capture

fi sheries. One of the most advanced market-based

initiatives is the Marine Stewardship Council (MSC),

which aims to reverse the decline of fi sh stocks,

safeguard livelihoods and deliver improvements

in marine conservation worldwide through the

certifi cation of fi sheries. To qualify for certifi cation,

fi sheries need to be committed to: maintaining and

re-establishing healthy populations of targeted species;

preserving ecosystem integrity; developing effective

fi sheries management systems that account for

relevant biological, technological, economic, social,

environmental and commercial aspects; and encouraging

compliance with local and national laws and standards,

and international understandings and agreements.

At the end of 2006, 21 fi sheries were certifi ed, more

than 20 fi sheries were under assessment and more

than 50 fi sheries were engaged in the MSC program,

representing over 4 million tons of seafood (according to

the Food and Agriculture Organization, global capture

production in 2004 reached 95 million tons). At least

450 seafood products carried the MSC eco-label in some

25 countries, and more than 195 businesses backed the

certifi cation program. The majority of certifi ed fi sheries

are currently located in developed countries, but MSC

is planning to expand to several developing countries

including, Papua New Guinea, Uganda, the Bahamas

and Vietnam. An outstanding challenge for MSC and

other certifi cation schemes (not just in fi sheries) is

securing broad participation across the supply chain,

from production through to retail markets.

TourismAccording to The International Ecotourism Society

(TIES), traditional “sun-and-sand” tourism oriented

around large resorts has matured as a market. In

contrast, more “experiential” tourism, including

ecotourism, nature, heritage, cultural and soft

adventure tourism, is predicted to grow rapidly over

the next two decades. To guide development of

this rapidly growing sub-sector, the Tour Operators’

Initiative for Sustainable Development is creating

environmental guidelines for hotels, resorts and tourist

attractions in biodiversity hotspots. Guidelines on

“Sustainable Hotel Siting, Design and Construction”

have been adopted by many large hotel chains and the

Convention on Biological Diversity, in partnership with

the tourism industry, has also developed “Guidelines on

Biodiversity and Tourism Development”.

Financial servicesTools similar to certifi cation have been developed

to help investors compare companies or investment

portfolios in terms of their social and environmental

impacts. NGOs, government agencies and an

increasing number of major fi nancial fi rms have

worked together to raise awareness of ecosystem risks

and opportunities for the investment community,

to identify and share best practice, and to develop

common standards for corporate environmental

management and reporting. Many international banks

have developed policies to reduce environmental risks,

while some leading fi nancial companies have identifi ed

biodiversity and ecosystem services as emerging issues

that could signifi cantly affect the value of their (and

their customers’) investments.24

01-20_ARP.indd Sec1:10 26.09.2007 15:18:03

11

Insight Investment – a UK fund manager – together

with Fauna & Flora International – a UK-based

conservation organization – jointly developed

a Biodiversity Benchmark for asset managers, a rating tool to benchmark companies

in the extractive and utility sectors with respect to

biodiversity impacts, risk assessment procedures and

the efforts that companies make to manage such

impacts and risks.

The Biodiversity Benchmark compares companies

in terms of how they manage their exposure

to biodiversity risks and was used in 2004 and

2005. Feedback from companies suggests that

the benchmark tool has encouraged improved

biodiversity performance, strengthening the

business case and providing a logical framework

in both the development and audit of biodiversity

management processes. Further work is currently

underway to extend the benchmark tool to other

sectors and countries, with support from the United

Nations Environment Programme Finance Initiative.

Limits on markets for ecosystem

services

While market-based

mechanisms appear to

work well for certain

ecosystem services and in

some contexts, they are

no silver bullet. Experience

to date suggests that the

most diffi cult ecosystem

services to bring into the

marketplace are what the MA calls “regulating” and

“supporting” services, such as nutrient cycling, water

purifi cation and natural pest control. These ecosystem

services clearly underpin human welfare and a range

of economic activities, but they can also be extremely

diffi cult to measure and link to specifi c providers or

benefi ciaries and are highly variable across sites.

The potential of markets for ecosystem services is also

limited by weak institutions and governance.25 In

many countries, property rights over natural resources

are not well-defi ned, environmental damages are not

penalized or compensated, and positive contributions

to ecosystem health are not rewarded. The experience

of the EU Emissions Trading Scheme for greenhouse

gases clearly illustrates the importance of enabling

policy in kick-starting a market, in this case by

generating demand for carbon allowances. Others

point to continuing gaps in international law that

undermine the potential of market-based approaches

(e.g., lack of consensus on access and benefi t-sharing

arrangements for genetic resources or how to manage

biodiversity in the high seas).

A major barrier to comparing conventional and market-

based approaches to ecosystem management is lack

of experience with the latter. Although market-based

approaches to ecosystem management have attracted

signifi cant interest from public agencies, private

investors, and researchers, most ecosystem service

markets are still in the early stages of development.

Key issues to consider as these markets develop include:

Cultivating an ethic of environmental stewardship throughout the business world;

Finding consensus on the roles and responsibilities of governments, business and other stakeholders;

Defi ning environmental principles, standards and indicators appropriate for eco-enterprise and markets;

Ensuring that markets for ecosystem services do not result in conservation for the rich at the expense of the poor;

Monitoring and enforcing the environmental performance of business in credible ways.

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12

Towards markets for ecosystem

services

Conventional approaches to ecosystem management have sought to protect natural resources by regulating business practices and taxing profits (or soliciting charitable contributions) to finance public conservation programs. Such policies are an essential part of the conservation “tool box”. They can stimulate business action to protect the environment and raise significant financial resources for conservation. Nevertheless, such efforts are essentially a “rear-guard” action, based on the idea of defending nature against the onslaught of growing economic pressure.

Another option is available. We can create and expand

markets for a range of ecosystem services, in the

same way that markets now exist at a global level for

carbon, and in some countries for sulfur dioxide (SO2),

nitrogen oxides (NOx) or water quality. The idea is to

make the sustainable management of ecosystems and

the enhancement or delivery of ecosystem services a

profi table enterprise, just like any other business venture.

The potential of market-based environmental

stewardship is not in doubt; the real challenge is to

demonstrate to policy-makers, business leaders and the

general public that a range of ecosystem services can

be managed effectively, effi ciently and equitably using

market-based mechanisms.

It is not easy to predict how much additional

investment can be mobilized or which ecosystems

or businesses will benefi t most from market-based

approaches to conservation. Who could have foreseen

the explosive growth in demand for organic foods in

some countries over the past 10 years? Who would

have thought that European forests would come

to dominate the supply of certifi ed timber? What is

clear, in both cases, is that large changes in corporate

and consumer behavior were achieved with modest

investments by those leading the campaign.

A key question is how to identify the most cost-effective

market-based mechanisms, in terms of environmental

outcomes and fi nancial leverage. Experience to date

suggests that rapid innovation can be achieved through

voluntary, sector-wide initiatives, such as certifi cation

standards or voluntary offset schemes, but that

widespread and sustained change in environmental

performance often requires institutional and/or

regulatory reforms, underpinned by the force of law.26

Partnerships among governments, conservation groups

and businesses can stimulate new ways of delivering

ecosystem services through the market. Increased effort

is needed to identify investment opportunities that

deliver the most valuable ecosystem services, to develop

cost-effective ecosystem management systems for big

and small businesses (e.g., standards, guidelines and

metrics), and to design effi cient and equitable market-

based environmental policy and incentives. Robust

monitoring and enforcement mechanisms are needed

to ensure the credibility of markets for ecosystem

services, and the organizations that implement them.

Complementary efforts by governments and other

stakeholders to conserve those ecosystems and services

that are currently not marketable, but which have

important option values for the future, are likewise

essential, in order to secure and sustain the support of

civil society for market-based conservation.

Whatever the future holds for market-based

management of ecosystems, governments and NGOs

will continue to play an important role. Markets cannot

succeed without effective environmental regulations and

equitable governance at local, national and international

levels. Patience, vigilance and a good measure of

fl exibility will be needed by all stakeholders to ensure

that market-based approaches live up to their promise.

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13

There is increasing awareness of the importance of ecosystems and their services for sustaining life on earth. This is accompanied by a growing sense of urgency about the need to halt the on-going loss and degradation of ecosystems. A range of multi-stakeholder initiatives involving governments, civil society organizations and the corporate sector have consistently emphasized this point, notably the Millennium Ecosystem Assessment (MA). The challenge today is to identify the practical steps that can be taken to conserve ecosystems and the role of business in such efforts.

Several business organizations and networks have

produced guidelines and seek to share good practice

relating to ecosystem management. These include the

International Council on Mining and Minerals (ICMM)

and the International Petroleum Industry Environment

Conservation Association (IPIECA). A related initiative is

the Business and Biodiversity Offsets Program (BBOP),

which brings together business and conservation

organizations to explore how to compensate for

biodiversity loss. Another example is the Ecosystem

Services Review (ESR) tool, developed by the WBCSD in

collaboration with the World Resources Institute (WRI)

and the Meridian Institute. Designed to help businesses

understand their ecosystem impacts, dependence and

assets, this tool is currently being tested by WBCSD

member companies Akzo Nobel, BC Hydro, Dupont,

Rio Tinto, Mondi and Syngenta. The ESR tool is based

on and consistent with the MA, which outlines practical

ways that businesses can understand the linkages

between their activities and ecosystems, how to

mitigate adverse effects, and how to take advantage of

positive linkages.

Understand ecosystems and their servicesThe fi rst step for many businesses is to refl ect on the

many products and services that ecosystems supply.

While some products are well-known, e.g., freshwater,

food, wood, some ecosystem services are less obvious

but no less important, e.g., climate regulation,

protection from soil erosion, pollination.

Assess dependence and impacts Based on this refl ection, businesses can begin to assess

the ecosystem products and services on which they

rely, either directly as raw materials or indirectly via

support to production processes, as well as which

ecosystems provide these benefi ts, where they are

located and their current status. This assessment

may be applied to the entire business supply chain.

Individual companies need to be aware of the

ecosystem goods and services on which their suppliers,

partners and customers rely, and whether their own

operations have an impact on ecosystem services upon

which other people depend. Such a review can start

small and focus on a single product line or business unit

and subsequently be scaled up.

Getting started

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Five steps to becoming a good trader of ecosystems services

1. Know that you are selling ecosystem services at full cost;

2. Know that you are buying ecosystems services at full cost;

3. Ensure clear ownership of the ecosystems services that are to be traded;

4. Ensure clear and transparent accountability of the ecological value accruing to the owner as a result of the sale;

5. Create competition among buyers and sellers.

Reduce impact and scale up solutionsThe next step is to develop strategies, policies and

operational approaches for ecosystem management,

guided by the hierarchy of “avoid, minimize, mitigate

and offset” impacts. This should include setting targets

for improved performance and reporting results to

shareholders and other stakeholders. Finally, businesses

should build alliances with scientifi c and research

organizations, NGOs, industry associations and

governments with a view to improving understanding

of ecosystem services, scaling up solutions to ecosystem

challenges and sharing their tools and experience.

Explore and pursue new business opportunitiesBased on the process of ecosystem assessment and

response outlined above, businesses will be better

able to gauge what new opportunities might exist

and to capitalize on them. Such opportunities may

include developing new products, services and

technological solutions, establishing new markets and

new businesses, or taking advantage of previously

unexploited cost reductions and revenue streams.

Finally, businesses should lend support to government

initiatives that strengthen incentives for more

sustainable management of ecosystems.

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Notes

1. This document is based on a forthcoming report entitled “Building Biodiversity Business”, by Joshua Bishop, Sachin Kapila, Francis Hicks, Paul Mitchell and Frank Vorhies. The full report is available online at: http://www.iucn.org/themes/economics.

2. Decision VIII/17 of the Convention on Biological Diversity, adopted by the Conference of the Parties meeting in Curitiba, Brazil, in March 2006, calls for increased engagement of and with the private sector in all aspects of biodiversity conservation.

3. Millennium Ecosystem Assessment. www.MAweb.org (accessed July 2007).

4. Hooper, D.U., F.S. Chapin III, J.J. Ewel, A. Hector, P. Inchausti, S. Lavorel, J.H. Lawton, D.M. Lodge, M. Loreau, S. Naeem, B. Schmid, H. Setälä, A.J. Symstad, J. Vandermeer, and D.A. Wardle. “Effects of Biodiversity on Ecosystem Functioning: A Consensus of Current Knowledge”. Ecological Monographs, 75(1): pp. 3–35. 2005.

5. Kramer, R. and E. Mercer. “Valuing a Global Environmental Good: U.S. Residents’ Willingness to Pay to Protect Tropical Rain Forests”. Land Economics, 73: pp. 196-210. 1997.

6. Krug, W. “Private Supply of Protected Land in Southern Africa: A Review of Markets, Approaches, Barriers and Issues”. Workshop Paper prepared for the World Bank/OECD International Workshop on Market Creation for Biodiversity Products and Services. Paris, January 2001.

7. See for example: www.ecotourism.org, www.ifoam.org, and www.unece.org.

8. Daily, G.C. and K. Ellison. The New Economy of Nature and the Marketplace: The Quest to Make Conservation Profi table. Washington, DC: Island Press. 2002.

Ferraro, P.J. and A. Kiss. “Direct Payments to Conserve Biodiversity”. Science 298 (29 November): pp. 1718-1719. 2002.

Fox, J. and A. Nino-Murcia. “Status of Species Conservation Banking in the United States”. Conservation Biology 19 (4): pp. 996-1007. 2005.

Gutman, P. (ed.). From Goodwill to Payments for Environmental Services: A Survey of Financing Options for Sustainable Natural Resource Management in Developing Countries. Washington, DC: Danida and WWF. 2003.

Jenkins, M., S. Scherr and M. Inbar. “Markets for Biodiversity Services”. Environment Vol. 46, N° 6, July/August: pp. 32-42. 2004.

Johnson, N., A. White and D. Perrot-Maître. Developing Markets for Water Services from Forests: Issues and Lessons for Innovators. Washington, DC: Forest Trends with World Resources Institute and the Katoomba Group. 2001.

Landell-Mills, N. and I. Porras. Markets for Forest Environmental Services: Silver Bullet or Fool’s Gold? London: International Institute for Environment and Development. 2002.

Mantua, U., M. Merlo, W. Sekot and B. Welcker. Recreational and Environmental Markets for Forest Enterprises: A New Approach towards Marketability of Public Goods. Wallingford, UK: CABI Publishing. 2001.

Pagiola, S., J. Bishop and N. Landell-Mills (eds.). Selling Forest Environmental Services: Market-Based Mechanisms for Conservation and Development. London: Earthscan. 2002.

Scherr, S., A. White and A. Khare with M. Inbar and A. Molnar. “For Services Rendered: The current status and future potential of markets for the ecosystem services provided by tropical forests”. Technical Series No 21. Yokohama: International Tropical Timber Organization. 2004.

Swingland, I. (ed.). Capturing Carbon and Conserving Biodiversity: The Market Approach. London: Earthscan. 2002.

Wilkinson, J. and C. Kennedy. Banks and Fees: The status of off-site wetland mitigation in the United States. Washington, DC: Environmental Law Institute. 2002.

9. EEA. Market-based instruments for environmental policy in Europe”. Technical report No 8/2005. Copenhagen: European Environment Agency. 2005. “

Huber, R. M., J. Ruitenbeek and R. Seroa da Motta. “Market-based instruments for environmental policymaking in Latin America and the Caribbean: Lessons from eleven countries”. World Bank Discussion Paper No. 381. Washington, DC: The World Bank. 1998.

Stavins, R. “Market-Based Environmental Policies: What Can We Learn from U.S. Experience and Related Research?” Faculty Research Working Papers Series, No. RWP03-031. Cambridge, MA: John F. Kennedy School of Government, Harvard University. 2003.

Tietenberg, T. “The Tradable Permits Approach to Protecting the Commons: What Have We Learned?” Nota di Lavoro 36. Venice: Fondazione Eni Enrico Mattei. 2002.

10. World Resources Institute (WRI) in collaboration with United Nations Development Programme (UNDP), United Nations Environment Programme (UNEP), and World Bank. World Resources 2005: The Wealth of the Poor – Managing Ecosystems to Fight Poverty. Washington, DC: WRI. 2005.

Scherr, S. J., A. White and D. Kaimowitz. A new agenda for forest conservation and poverty reduction: making markets work for low-income producers. Washington, DC: Forest Trends. 2004.

11. Clark, D. and D. Downes. What Price Biodiversity? Economic Incentives and Biodiversity Conservation in the United States. Washington, DC: Center for International Environmental Law. 1996.

12. Kousky, C. Choosing from the Policy Toolbox. 2005. ecosystemmarketplace.net (accessed May 2006).

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16

13. Capoor, K. and P. Ambrosi. State and Trends of the Carbon Market 2007. Washington, DC: The World Bank. 2007.

14. Wilkinson, J. and C. Kennedy. Banks and Fees: The status of off-site wetland mitigation in the United States. Washington, DC: Environmental Law Institute. 2002.

15. Chomitz, K. M., T. S. Thomas and A.S. Brandão. “Creating markets for habitat conservation when habitats are heterogeneous”. Paper presentation at the Fourth BioEcon Workshop on the Economics of Biodiversity Conservation – Economic Analysis of Policies for Biodiversity Conservation. Venice International University, Venice, 28-29 August 2003.

16. van Bueren, M. “Emerging Markets for Environmental Services: Implications and opportunities for resource management in Australia”. RIRDC Publication No 01/162. Barton, Australia: Rural Industries Research and Development Corporation. 2001.

17. ten Kate, K., J. Bishop and R. Bayon. Biodiversity offsets: Views, experience, and the business case. Gland, Switzerland and Cambridge, UK: IUCN, and London, UK: Insight Investment. 2004. [Available from www.eldis.org/static/DOC16610.htm]. Other terms commonly used to describe biodiversity offsets include “compensatory mitigation”, “conservation banking”, “complementary” or “compensatory remediation”, “reconstitution” or “replacement” of affected ecosystems, etc.

18. Wilkinson, J. and C. Kennedy. Banks and Fees: The status of off-site wetland mitigation in the United States. Washington, DC: Environmental Law Institute. 2002.

19. Proposals for international fi nancial transfers based on the concept of “tradable development rights” have been circulating for years, mainly in the academic literature. See, for example: Cervigni, R. “Biodiversity: Incentives to Deforest and Tradable Development Rights”. CSERGE (The Centre for Social and Economic Research on the Global Environment) Working Paper GEC 93-07. London: University College London. 1993.

Panayotou. T. Conservation of Biodiversity and Economic Development: The Concept of Transferable Development Rights. Environmental and Resource Economics, Vol. 4: pp. 91-110. 1994.

20. See: BBOP at www.forest-trends.org/biodiversityoffsetsprogram; BNI at www.biodiversityneutral.org/index_content.html; ICMM at www.icmm.com/newsdetail.php?rcd=67.

21. Willer, H. and Y. Minou (eds.). The World of Organic Agriculture: Statistics and Emerging Trends 2006. Bonn, Germany: International Federation of Organic Agriculture Movements (IFOAM) & Frick, Switzerland: Research Institute of Organic Agriculture. 2006.

22. UNECE. 2006. Forest Products Annual Market Review: 2005-06. Geneva Timber and Forest Study Paper 21. New York & Geneva: UN Economic Commission for Europe/FAO.

23. See: www.tropenbos.nl/DRG/certifi cation.html.

24. For example, Goldman Sachs has developed an Environmental Policy Framework. Under this Framework, “Goldman Sachs will not fi nance a project or initiate loans where the specifi ed use proceeds would signifi cantly convert or degrade a critical natural habitat. In addition we [Goldman Sachs] will not knowingly fi nance extractive projects or commercial logging in World Heritage Sites”.

25. Friends of the Earth International. Nature for Sale: The impacts of privatizing water and biodiversity. 2005.

Von Wiezkacker, E.U., O.R. Young and M. Finger. Limits to Privatization: How to avoid too much of a good thing. London: Earthscan. 2005.

Greenspan-Bell, R. and C. Russell. “Environmental Policy for Developing Countries”. Issues in Science and Technology, Spring: pp 63-70. 2002.

26. Johnstone, N. (ed.). Environmental Policy and Corporate Behaviour. Cheltenham, UK: Edward Elgar. 2007.

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About WBCSD

The World Business Council for Sustainable Development (WBCSD) brings together some 200 international companies in a shared commitment to sustainable development through economic growth, ecological balance and social progress. Our

members are drawn from more than 30 countries and 20 major industrial sectors. We also benefi t from a global network of about 60 national and regional business councils and partner organizations.

Our mission is to provide business leadership as a catalyst for change toward sustainable development, and to support the business license to operate, innovate and grow in a world increasingly shaped by sustainable development issues.

Our objectives include:

Business Leadership – to be a leading business advocate on sustainable development;Policy Development – to help develop policies that create framework conditions for the business contribution to sustainable development;The Business Case – to develop and promote the business case for sustainable development;Best Practice – to demonstrate the business contribution to sustainable development and share best practices among members;Global Outreach – to contribute to a sustainable future for developing nations and nations in transition.

www.wbcsd.org

About the World Conservation Union (IUCN)

Founded in 1948, The World Conservation Union brings together States, government agencies and a diverse range of non-governmental organizations in a unique world partnership: over 1000 members in all, spread across some 140 countries.

As a Union, IUCN seeks to infl uence, encourage and assist societies throughout the world to conserve the integrity and diversity of nature and to ensure that any use of natural resources is equitable and ecologically sustainable. A central Secretariat coordinates the IUCN Programme and serves the Union membership, representing their views on the world stage and providing them with the

strategies, services, scientifi c knowledge and technical support they need to achieve their goals. Through its six Commissions, IUCN draws together over 10,000 expert volunteers in project teams and action groups, focusing in particular on species and biodiversity conservation and the management of habitats and natural resources. The Union has helped many countries to prepare National Conservation Strategies, and demonstrates the application of its knowledge through the fi eld projects it supervises. Operations are increasingly decentralized and are carried forward by an expanding network of regional and country offi ces, located principally in developing countries.

The World Conservation Union builds on the strengths of its members, networks and partners to enhance their capacity and to support global alliances to safeguard natural resources at local, regional and global levels.

Contributing authorsJoshua Bishop and Lloyd Timberlake

AcknowledgementsWe would like to thank the members of the WBCSD and IUCN teams for their support and input to this publication.

We would also like to thank all the reviewers for their valuable comments and guidance: Andrea Athanas (IUCN), Ricardo Bayon (Ecosystem Marketplace), Barbara Dubach (Holcim), Sachin Kapila (Shell), Jeff McNeely (IUCN), Chris Perceval (Earthwatch), Mohammad Rafi q (IUCN), Janet Ranganathan (World Resources Institute), and Dave Richards (Rio Tinto).

Photo credits Dreamtime, Jillian Reichenbach Ott Copyright © IUCN and WBCSD. September 2007. Printer Atar Roto Presse SA, Switzerland Printed on paper containing 50% recycled content and 50% from mainly certifi ed forests (FSC and PEFC) 100% chlorine free. ISO 14001 certifi ed mill. ISBN 978-3-940388-11-7

DisclaimerThis brochure is released in the name of the WBCSD and the World Conservation Union (IUCN). It has been developed by the WBCSD and IUCN secretariats and is intended to support discussions around Ecosystem Markets within the WBCSD and IUCN membership and with other stakeholders in civil society and government. It does not necessarily represent the views of WBCSD or IUCN members.

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The World Conservation Union – IUCN Rue Mauverney 28, CH-1196 Gland, SwitzerlandTel: +41 (0)22 999 0221, Fax: +41 (0)22 999 0020, E-mail: info@iucn.org, Web: www.iucn.org

World Business Council for Sustainable Development – WBCSDChemin de Conches 4, 1231 Conches-Geneva, SwitzerlandTel: (41 22) 839 31 00, Fax: (41 22) 839 31 31, E-mail: info@wbcsd.org, Web: www.wbcsd.org

WBCSD North America Office1744 R Street NW, Washington, DC 20009 United StatesTel: +1 202 420 77 45, Fax: +1 202 265 16 62, E-mail: washington@wbcsd.org

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